Commentaries

Derivatives moolah

The nation’s top commercial banks are poised to generate record revenue from trading derivatives this year. And that’s as good a reason as any why no one should expect the nation’s bank to go along peacefully with a plan to regulate the trading of these sophisticated instruments.

In the first half of the year, the 25 biggest commercial banks took in $15 billion from trading derivatives, with JPMorgan Chase and Goldman Sachs being two of the biggest beneficiaries. And as things stand now, the nation’s banks will easily surpass the record $18.8 billion in derivatives trading revenue taken in during 2006.

In short, there’s a lot of money to be made from trading derivatives. So don’t expect banks to easily accept new rules that will put a crimp in this important source of income.

Oh, and just where did Goldman get most of its derivatives trading revenue from? Trading credit default swaps and other credit derivatives. The OCC reports that Goldman, in the second quarter, raked-in $1.48 billion from trading CDS-like transactions.

That ain’t chump change.

Derivatives league table

Goldman Sachs is moving up the derivatives charts—with a bullet.

In the latest ranking of US banks with large derivatives exposure, Goldman moves up from fourth place to second, according a report from the Office of the Comptroller of the Currencey. The notional value of Goldman’s derivatives contracts at the end of the first quarter was $39.9 trillion, up from $30.2 trillion in the fourth quarter of 2008.

Goldman leapfrogged over Citigroup and Bank of America. The total value of derivatives contracts is down a bit at Citi and holding steady at BofA compared to the fourth quarter. That’s not too surprisingly, given that those two banks continuing problems with troubled assets on their balance sheets.

But derivatives contracts are down too at JPMorganChase, the king of the derivatives mountain. Total notional value at JPMorgan fell to $81.1 trillion from $87 trillion.

Now Goldman still has a way to go to catch-up to the leader. But with Lehman Brothers and Bear Stearns out of the picture, it looks like Goldman means business.

Goldman’s derivatives puzzle

Earlier today I posted an item saying that Goldman Sachs is hard as ever to figure out, based on the kind of information (or lack thereof) that it publishes about its operations.  I focused on a little-known Goldman real estate management company called Archon Group.

And now comes derivatives guru Janet Tavakoli with a nice followup, noting that Goldman offers few details in regulatory filings about its derviatives business, despite having some big exposure to those often complex investment contracts.

In a note to clients, Tavakoli notes that Goldman now ranks as the US bank with the fourth greatest notional value of derivatives at $30 trillion. But using an Office of the Comptroller of the Currency formula, she says Goldman has a far higher total credit exposure to capital ratio than JPMorgan Chase, Bank of America or Citigroup–the three banks with higher notional exposure.

And Goldman’s potential exposure isn’t just a little bit larger than its peers–it’s way, way larger. The OCC ratio for Goldman is 1,056, compared to smaller ratios of 179 for BofA, 278 for Citi and 382 for JPMorgan.

Tavakoli is not sure why there’s such a big discrepancy and says some of Goldman’s exposure could be offset with “collateral calls,” such as the kind the bank famously had with AIG. It doesn’t appear the OCC takes collateral calls into consideration in formulating its ratio. But guess what? Goldman provides little information in its regulatory filings to determine just how hedged, or limited its exposure to derivatives really is.

Says Tavakoli: “Goldman’s reporting on derviatives is very light, however. Goldman Sach’s 10K provides only a brief discussion of interest rate swaps used with variable interest entities and qualified special purpose entities.”

Maybe Goldman should start paying the lawyers who prepare its regulatory by the word. If that were to happen, maybe we’d start getting some fuller disclosure on all these important issues.